Foreign companies having their operations in India would not have to be taxed in the country if their Indian activities have been adequately remunerated in the hands of the Indian entity.

In a landmark judgment on Friday, the Bombay High court overturned the earlier order of the Income Tax Appellate Tribunal Mumbai in a case involving Sony Entertainment Television (SET) Satellite, Singapore and its Indian agent SET Satellite India, and said there is no tax liability on its income generated in the country but relayed abroad.

SET Satellite, Singapore had appealed against the ITAT ruling and had argued that

if the permanent agent in India was paying tax, then there is no tax liability on the earnings generated in India but sent to Singapore.

SET Satellite, India, worked as an agent and its mainly earned commission on the revenue it sent to Singapore and it was complying with the tax norms, SET Satellite Singapore claimed. It also retained a part of the revenue it had earned in the country through advertisements and other means.

However the revenue department had contended that if a company has an economic nexus in India then a foreign company would be liable to pay tax as a dependent agent permanent establishment as all the income was earned in India and.

The ruling will imply that foreign companies remunerating their dependent agents in India on an arms length basis will not be liable to pay tax in the country. This is because although the agents will constitute a permanent establishment (PE), no profits can be attributed to them. Arms length price means a price, which is applied or proposed to be applied in such transactions between persons other than, associated enterprises, in uncontrolled conditions.

Tax experts said the ruling, which is on the lines of the Supreme Court decision in the Morgan Stanley case, would impact companies that have a dependent agent in India in the form of back office operations, research and development offices and subsidiary companies and will help them save on tax bill in India. The department of revenue however may appeal against the ruling in the Supreme Court, they added.

Mukesh Butani partner BMR & Associates said, The revenue departments right to levy tax on the profits of a dependent agent PE will now have to be read along with the Indian legislation which prescribes that no profits can be attributed toa PE if the dependent agent is remunerated on an arms length basis.

NP Singh, COO Multi Screen Media (formerly SET, Satellite India) said, We are happy about the judgement although it will be difficult to comment on it without reading a copy of the ruling.